Buffett's Question On Growth. What Would You Pick? (#15)
Warren Buffett Posed A Counterintuitive Question At The 1994 Berkshire Hathaway Annual Meeting
Growth is something I see bandied about very carelessly. Or at least without much thought being put into the mechanics behind growth. Yet growth usually requires additional capital investment. Not every business can be an Amazon or Walmart with negative working capital (thereby producing cash as they grow). But even these companies require investment in physical plant/equipment as unit volume and revenues grow.
Even the benign and “typical” 3% organic / GDP growth plugged into DCF models requires capital investment. The most egregious offenders, however, think all growth is good and/or that growth will cure most evils.
Warren Buffett certainly understands the value of growth. But he’s also aware that it’s profitable growth that creates value. He’s also much more interested in how much a business can give him today, and places a high value on certainty.
In 1994 a shareholder asked Buffett what growth rate he uses for a “predictable” company. Buffett could clearly see the “give me the formula” intent behind the question and delved into a wonderful dialog.
In it, he posed a question, which I’ve in turn posed to Twitter as a poll (see below). You can find the correct answer and the full Q&A exchange in the video below.
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Note: I’ll be on vacation next week. See you in August!